This report / article has been prepared for general information purposes only. Any opinions herein reflect the views of the Analyst and/or Author as at the date appearing above, and does not constitute a recommendation or individual investment advice, nor should it be considered a solicitation for the purchase or an offer of securities. Information contained in this report is derived from sources believed to be reliable, but its accuracy cannot be guaranteed. The information provided herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country including the United States, where such distribution or use would be contrary to law or regulation or which would subject PearTree to any registration requirement within such jurisdiction or country.
This Forum contains the sole opinions & insights of the author based on forty years of providing advice to donors and charities. Others may totally disagree with the author’s views. This Forum is intended as a conversation. Robust debate is invited. Please respond with questions and alternative viewpoints to email@example.com
This issue of the Gift Planning Forum will focus on a technical legal structure, the Charitable Remainder Trust (CRT) and your ability to create special relationships with donors using this planned giving (PG) mechanism.
CRTs are one of the most popular giving mechanisms in the US. In Canada, it is not very well known or recommended which is unfortunate, as it is an incredible opportunity for a certain group of Canadians, to be described below.
A CRT is a trust that holds capital transferred into the trust by the donor (the settlor). The trust document sets out the income beneficiary of the trust, namely the donor (and perhaps the spouse), for life. No capital encroachment during lifetime is permitted. At death, the capital reverts to the charity. The tax result is a current donation receipt during the donor’s lifetime based on the present value of the donated property that the charity receives on death.
There is no provision in the Income Tax Act dealing with CRTs. Old Interpretation Bulletin IT-226 furnishes CRA’s position on CRTs. Effectively if the trust is set up as described above, the donor is seen to have made a charitable gift at the time of transfer of the capital in the trust. As stated above, a receipt today for property which effectively is given up at death. Who is the right donor for this PG product?
The Right Donor
It is mathematical… If the intended donation (and tax receipt) is more than enough to shelter taxes otherwise payable on death then there is value in accelerating the donation receipt to shelter current taxes being paid during the donor’s lifetime.
Consider Marie who is 81 years old. She has a home worth $800,000, securities of $1m (appreciated gains of $300,000) and a RRIF of $500,000. If she were to pass away today, her final return would contain an extra $650,000 of income ($500,000 of RRIF and $150,000 of taxable capital gains). She is leaving her entire estate to charity. Her estate will receive a donation receipt of $2.3m and perhaps use $850,000 of the receipt on her final and penultimate tax returns. This is good but effectively $450,000 of receipt is unused. The CRT uses up the unused receipt during lifetime, saving tax today at no cost to the donor, as the donor continues to receive income during lifetime on the funds in the CRT.
The CRT creates “free” tax savings for qualifying donors. The charity offering this mechanism can create a close relationship with the donor and has an opportunity to obtain large legacy gifts.
The receipt today is effectively a present value calculation with three components: the capital transferred (assume $100,000), mortality, and an interest rate. Mortality is unknown so we are allowed to use Canadian life expectancy charts. For Marie (female, age 81) I see that life expectancy is 10.2 years, say 10 years. For interest rates, I would use Government of Canada money for the lifespan of 10 years. www.bankofcanada.ca indicates 1.54%.
Present value of $100,000, 10 years, and 1.54% is $85,827. Thus, Marie will receive this receipt in 2021 for a transfer this year.
(Present value calculations can be done in Excel. A trick I use is using a calculator, I put in $100,000 then divide by 1.0154 and then click equal 10 times; this will give you the present value number.)
Should Marie transfer $100,000? No, one should transfer the exact amount to achieve the desired receipt… If a $50,000 receipt is needed, calculate backwards and transfer $58,625 to the CRT. Reduce taxes by say $24,000 in 2021, eliminate the need for instalments in 2022 and then in December 2022 do it again to reduce 2022 taxes based on what is needed then. Effectively eliminate most taxes for 5-8 years (never transfer all her money, remember you cannot take the capital back once transferred to the Trust).
The Donor – Marie
The assumption is that Marie is giving all her estate to charity. She is doing so because she does not have children. Experience indicates that this category of person can leave if not all, a large percentage of the estate to charity. Charities looking for legacy gifts can do a lot better with Marie than usually a wealthier Canadian who has children.
Eric Grenier posted a CBC News item in 2017, More Canadians living alone and without children, census figures show, that 28.2% of households are one-person households and a further 25.8% are couples without children households. These numbers have dramatically increased. Why – same sex marriages, reduced marriage rates, much later marriage ages, etc. have contributed to a different society. There are more and more couples and singles who like Marie will not have children.
The CRT creates “free” tax savings for qualifying donors. The charity offering this mechanism can create a close relationship with the donor and has an opportunity to obtain large legacy gifts. For example, I am aware of a large annual campaign that receives 7% of its campaign from income off endowments received from donors like Marie. As the data suggests that this segment of society is growing, it would seem beneficial that sophisticated charities create CRT programmes.
Other CRT Issues
- A transfer of appreciated securities into a CRT does not result in a capital gains exemption. A transfer of appreciated property can result in capital gains realized, although the use of an alter-ego trust can delay the realization til death (Stay tuned for more on this topic later in the year).
- A CRT set up in a will (the will indicates that a trust is to be set up to benefit the spouse during lifetime (with no capital encroachment allowed) with the charity benefitting on the spouse’s death) no longer is considered a CRT yielding an immediate receipt. To that I say, yech!
- Stimulated by the bad news of the above two points, there have been some opposite CRTs created that look more like Charitable Lead Trusts out of the US. Charitable Lead Trusts are very popular in the US. Effectively property is transferred to a trust and capital is removed over time. The following is a Canadian version.
Consider A who would like to give a sum to a spouse or a child but wishes for the sum to be distributed over time, and wishes to help a charity. His will sets out that on death, $1m is transferred to a trust governed by Charity B (no tax receipt for the $1M). The trust provides that the income of the trust is retained / paid annually to the Charity B (of course B does not pay tax on the income). B uses the funds for its activities or reinvests the money and builds a fund.
The trust further states that annually the trust distribute $50,000 of capital to spouse for a period of the earlier of 20 years or the life of spouse. The spouse will receive the distributions tax-free with no effect on Old Age Security (OAS) claw back since the $ 50,000 / year is on account of capital and therefore not income that claws back OAS… At the end of the distribution period, in this example 20 years, whatever is left in the trust goes to Charity B.I bet that A is giving other gifts to B given the relationship and trust created.
This is certainly an approach, which can yield long-term benefits to charities. However, it is not easy and requires a fair amount of work and the participation of the entire team including the Charity’s accounting staff. However, in my experience, if you compare the time spent on securing a legacy gift from a HNW donor the time is well spent. Think of a donor with an expected $20M net worth on death agreeing to give you a legacy gift of 10% or $2M vs. my Marie example accessing 100% of her relatively modest net worth and where we lock in the gift a decade before her likely demise.
The next issue of the Forum will look at the practical effects of CRT contracts, investments, tax returns and marketing.
We’d love to hear from you! Please direct any questions to AskBobby@peartreecanada.com and the answers will appear in the next Forum
Bobby started in philanthropy in August of 1994 by becoming the Executive Director of the Jewish Community Foundation of Montreal (JCF) which is seen to be Canada’s most donor-centred foundation.
Previously a Partner in Taxation at Ernst and Young, he is now a Planned Giving Consultant specializing in tax-assisted giving. Bobby has helped many Canadian charities design their planned giving programmes, and has written numerous articles on the subject. He is also Past-President of the Conseil de la Philanthropie du Quebec, the Table Ronde du Quebec of the CAGP, JIAS Canada, JIAS Montreal, and the Mount Royal Tennis Club.